Obama’s Stimulus Package: Paving The Wrong Road

All sorts of opinion is out there concerning PEBO’s desired stimulus package. I pick Jonathan Cohn’s over at the Plank[1] because it pretty much covers what I want to cover. For instance:

The general consensus among left-of-center economists these days is that government spending, rather than tax cuts, represent the most efficient way to fight recessions. Among other things, people who receive tax cuts don’t always spend the money right away. More affluent people, in particular, tend to put that money into savings–a move less likely to generate economic activity in the short term.

Consider that paragraph carefully. Look at the claims it makes. A) government spends money more efficiently than people do. B) affluent people tend to save their money and thus are less likely to generate “economic activity in the short term”.

Let’s deal with B) first. Where do “left-of-center” economists think the “affluent” put their savings? In a can in the back yard? At a minimum it is going into a bank. And the bank is going to do something with the money to make more money (that’s how they survive and prosper), and that’s how the investment cycle starts. The difference here is instead of letting the government pick the winners (i.e. the entities and programs it chooses to “invest” in by taxing, borrowing or printing money), you have the market picking the winners with its own money.

In reality, as Professor Douglas Houston points out, government stimulus packages are more politically driven than economically driven:[2]

“Government spending programs like these are political grab-bags whose successes are predicated on satisfying political interest groups, not on creating value and growth in a market economy; these government spending programs then often become embedded ‘entitlements,’ crowding out the flow of funds to private investments in a free marketplace.”
–
Douglas Houston
Professor, School of Business, University of Kansas

And you have to ask, as Scott Bradford does, given the government’s track record to this point, is this really wise?

“Governments make lots of a bad policy during times of economic stress. A spending package that approaches $1 trillion is a case in point. Do we really trust the Congress and the Executive Branch to spend such vast sums wisely, especially after all the bumbling around and ill-advised bailouts this year? Does the government really have a long list of well-thought-out, cost-effective projects that will help our economy? I do not think so.”
–
Scott Bradford
Associate Professor, Brigham Young University

As for point A), do left-of-center economists really believe what Cohn claims they do? That government spends money more efficiently than do people (I’m assuming his claim that money kept because of tax cuts isn’t spent the “right way” means it doesn’t provide as much stimulus as government spending – i.e. efficiency).

That’s just counter-intuitive from the get-go. Why? Alan Stockman addresses the point:

“[T]ax cuts will not create the waste [that] government spending would, because individual households are making their own decisions about which spending or investment projects are worthwhile for themselves.”
–
Alan Stockman
Wilson Professor of Economics, University of Rochester

David Laband echoes the point:

“Our economy as a whole will [not] benefit from taking money from current or future taxpayers to support a government spending spree. No doubt, certain interest groups will gain from feeding at the public sector trough. But losers surely will outnumber winners by a large margin. Our economy as a whole will benefit from Congress lowering taxes and letting Americans decide for themselves what is worth spending their hard-earned dollars on.”
–
David Laband
Professor of Economics and Policy, Auburn University

And Richard Wagner puts an exclamation point beside it:

“Any so-called stimulus program is a ruse. The government can increase its spending only by reducing private spending equivalently. Whether government finances its added spending by increasing taxes, by borrowing, or by inflating the currency, the added spending will be offset by reduced private spending. Furthermore, private spending is generally more efficient than the government spending that would replace it because people act more carefully when they spend their own money than when they spend other people’s money.”
–
Richard Wagner
Professor of Economics, George Mason University

Now I hesitate to call these folks I’ve quoted “right-of-center” economists, because I don’t know if that’s true. But what is certainly true is they do not agree with the two points Cohn attributes to “left-of-center” economists.

In fact, as James Butkiewicz points out, even the chair of Obama’s Council of Economic Advisers advocates tax cuts over government spending:

“Tax cuts are preferable to spending, especially the many programs that will doubtless result from this process. Even the designated chair of Obama’s CEA finds that increased taxes reduce growth.”
–
James Butkiewicz
Professor of Economics, University of Delaware

The fact that tax cuts are actually a part of the package is a good thing. What’s somewhat disturbing though is their inclusion is a matter of politics, not sound fiscal thinking. It has been included at the insistence of the Republicans with the view by Democrats being that their inclusion will help ease passage of the rest of the bill.

The rest of the stimulus package, some 350 to 450 billion dollars, is pointed toward spending on “infrastructure”. That is, large public projects. As Cohn notes:

On the other hand, coming up with $600 to $700 billion in well-timed government stimulus may not be as easy as it sounds. For a while now, Obama advisers have been warning that there are only so many ready-to-go infraustructure programs–and only so many social needs the states are prepared to meet quicky. To give you a sense of scale, total non-discretionary, non-military spending this year is only around $500 billion. As Paul Krugman explains on his blog,

…there’s a problem with a public-investment-only stimulus plan, namely timing. We need stimulus fast, and there’s a limited supply of “shovel-ready” projects that can be started soon enough to deliver an economic boost any time soon. You can bulk up stimulus through other forms of spending, mainly aid to Americans in distress–unemployment benefits, food stamps, etc.. And you can also provide aid to state and local governments so that they don’t have to cut spending-avoiding anti-stimulus is a fast way to achieve net stimulus. But everything I’ve heard says that even with all these things it’s hard to come up with enough spending to provide all the aid the economy needs in 2009.

So the consensus is, as Krugman says, “we need stimulus fast” and infrastructure programs don’t really lend themselves to providing that. But note what Krugman contends will provide that fast stimulus – more government spending. In fact, he contends that increased unemployment benefits, food stamps and aid to local and state governments is the way to go.

It is fraudulent nonsense.

As Donald Luskin says:

“Government spending does not create incentives for labor, innovation and investment. Instead of spending $1 trillion in Washington, let Washington forgive $1 trillion in tax revenues to create incentives for millions of individuals and firms to get the economy going again, one dollar at a time.”
–
Donald Luskin
Chief Investment Officer, Trend Macrolytics LLC

What is a better cure for unemployment than a job? So that being the case, what is the best way to stimulate job growth? Well certainly not by increasing spending on unemployment benefits and food stamps.

And what is the best way to encourage job creation?

“During recessions, unemployment rationalizes a role for government in creating jobs. But there is no reason these jobs should be directly working for the government: nothing about a recession justifies larger government. If we are worried about too few jobs, it makes sense to subsidize private employment (for example, by temporarily lowering payroll taxes or creating a new tax subsidy for new hires).”
–
Glen Weyl
Junior Fellow at the Society of Fellows and Post-Doctoral Fellow in the Department of Economics, Harvard University

And the infrastructure spending? Well Thomas Mayer has a good point about that:

“There is not only the problem that efficient projects are often slow to get to the point where they generate actual expenditures, but also that once the government starts spending it is hard to turn off the tap when the stimulus is no longer needed.”
–
Thomas Mayer
Professor Emeritus, University of California -Davis

Does anyone doubt his point? This so-called “stimulus” will in fact mostly stimulate a permanent expansion of government at all levels.

This “stimulus package” means the era of huge government is back and on steroids. Its passage means an economic sea change for this country, and not a positive one either.

Stacie Beck lays it out most succinctly:

“A spending stimulus will only delay the needed restructuring of the U.S. economy to remain internationally competitive. Tax cuts will facilitate that restructuring far better than spending and job creation by the government.”
–
Stacie Beck
Professor, University of Delaware

And Gene Smiley gives you the probable – and lamentable – outcome of its passage:

“An ‘economic stimulus’ program will do nothing to correct the serious price and resource misallocations that currently exist and are stopping the economy from moving back toward ‘full-employment.’ In fact, they will likely retard the recovery. They will divert resources from the private sector to the government sector moving us further away from a free-enterprise economy.”
–
Gene Smiley
Emeritus Professor of Economics, Marquette University

Pelosi and Reid are promising passage of a stimulus package by February. Obama is promising a deficit of 1.2 trillion[3]. There is a good way to keep from piling up that debt – defeat this stimulus package and insist on tax cuts as the primary means toward recovery. Then get government the heck out of the way.

Unfortunately that’s not at all what I think will happen. And the result – a repetition of something we’ve already seen but seem determined to ignore:

“Japan’s federal expenditures, following their 1989 stock market crash, have had little to no effect on their recovery. Japan has been left with a huge government debt per GDP ratio and nearly 20 years of little to no growth. Why on earth would the U.S. want to follow in Japan’s footsteps?”
–
Gary Quinlivan
Dean of the Alex G. McKenna School, St. Vincent College

Why indeed?

[Crossposted at QandO[4]]

Endnotes:

the Plank: http://blogs.tnr.com/tnr/blogs/the_plank/archive/2009/01/05/those-tax-cuts-sure-do-look-big.aspx

are more politically driven than economically driven:: http://republicanleader.house.gov/UploadedFiles/stimulusskeptics.pdf

a deficit of 1.2 trillion: http://www.nytimes.com/2009/01/07/us/politics/07obama.html?partner=rss&emc=rss